An MBL Program Can Offer Great Promise

Member Business Loans (MBLs) can be excellent vehicles for achieving risk diversification and higher yields while combatting shrinking margins and disproportionate exposure to potential losses on portfolios heavily weighted in favor of consumer loans. However, if a credit union is not properly staffed at the executive and Board level to implement and oversee an MBL operation, even when restricted to commercial real estate lending only, and if the corporate culture is not conducive to its success, the consequences can be disastrous. Moreover, aside from the risk of actual losses that are typically larger on member business loans, is the reputational risk associated with an inadequately staffed or managed MBL program that can go awry and taint an organization’s standing in the community and industry.

For some credit unions that are either new to, or less experienced in, business lending, the prospect of adding an MBL program is often viewed as simply a way to exploit a new revenue source. However these credit unions may be oblivious to the potential liabilities associated with MBL programs and the many unique and subtle nuances involved in their operation, a situation begging to be exacerbated when insufficient consideration is given to hiring adequately qualified and credentialed personnel. The propensity for this condition can be traced primarily to one factor, the inherent culture predominant in the credit union industry and its regulatory body in which all lending is seen primarily through the eyes of consumer lending professionals.

For example, while the minimum qualifications for an effective business lending professional in terms of education, experience and credentials varies among banks, conventional wisdom in the banking industry dictates that it should exceed the two years of direct experience only, that the NCUA under 12 CFR, Part 723.5 requires for a particular type of business lending. Granted, this is only a minimum that might be acceptable in a credit union with oversight by several qualified and seasoned business lending professionals. However, 12 CFR, Part 723.5 unfortunately does not make that distinction or even stipulate what kind of direct experience is acceptable, rendering it possible for a credit union to fully implement an MBL program staffed or even managed by an employee with not just two years of direct experience only, but with two years of direct experience from on-the-job training at a credit union only, and with no post-secondary education as well since the NCUA is silent on the latter three issues altogether. This is a situation that any seasoned business lending professional will tell you is woefully inadequate and something that commercial banks would never settle for. Therefore, why is it acceptable for credit unions? To prevent anecdotal stories from circulating in our industry about grossly unacceptable MBL practices and lapses in judgment, credit unions should revisit what constitutes a qualified business lending professional in view of commercial banking industry norms, not credit union industry norms. Flouting conventional wisdom in areas that credit unions lack expertise is a sure way to undermine the member confidence necessary to make our industry flourish.

 While a treatise on the numerous pitfalls that can befall a credit union with an MBL program contemplated or currently managed by those with primarily a consumer lending background is well beyond the scope of this article, a few of the lesser-known pitfalls are worth briefly mentioning, in particular those I would analogously characterize as ill-fated attempts to forcibly fit a square peg (a consumer lending mindset) into a round hole (an MBL program).

• Understanding MBL Relationships – In a consumer lending environment, outsourcing can be an effective cost-cutting measure, but in a business lending environment where the relationship between the individual client and banker is borne of mutual trust and respect for each other’s area of expertise, and where the stakes and rewards for client and banker respectively, are far greater, it can reflect a monumental lapse in judgment by those guided primarily by their experiences in a consumer lending environment. Those with primarily a consumer lending background might not recognize that outsourced relationships are essentially surrogate relationships, which by their very nature are disingenuous and incompatible with business lending. Forcing disingenuous relationships onto an MBL portfolio comprised of members generally characterized as more financially sophisticated is the quickest way to send at least the performing portion of that portfolio to your competition.

• Objectively Assessing Comparative Risks – This is best illustrated as follows; those with primarily a consumer lending background are oftentimes more likely to see potential losses on say 1% of a credit union’s total loan portfolio comprising member business loans generating higher yields and secured by income-producing properties, as something more ominous and threatening than the far greater potential losses that can occur on the remaining 99% of that loan portfolio comprising consumer loans generating the lowest yields and secured overwhelmingly by non-income-producing assets. Does this represent an objective assessment of comparative risk? The irony is that consumer lending environments tend to make those operating in them see less risk in what they are most familiar with only, despite the far greater proportional and aggregate risks.

• Psychology and Culture – Consumer lending professionals are predisposed to a certain mindset, elements of which are sometimes simply not compatible with an MBL program. For example, the customer service motto so prevalent and psychologically ingrained in the mind of consumer lending professionals that “the customer is always right” is a recipe for disaster in an MBL environment. Having consumer lending professionals function in capacities suited for MBL professionals is also something that doesn’t go unnoticed by MBL clients who sometimes see it as an internal form of outsourcing. If it’s reasonable to assume that MBL professionals fare better when their education, background, credentials and experiences are more closely aligned with the prospects they are soliciting, shouldn’t that be our industry’s goal?

• Commercial Lending Intermediaries – Those with primarily a consumer lending background too often equate the caliber, role and significance of commercial lending intermediaries with residential loan brokers because that might be their only frame of reference. However, the use of high caliber commercial lending intermediaries is an absolute necessity for a successful MBL program and mishandling them or their clients through the use of unqualified MBL professionals can have long term adverse consequences on the success of your MBL program and the reputation of your institution.

• Compensation Commensurate with Qualifications – Despite commercial banking industry practices to the contrary, some credit unions tend to equate the qualifications and compensation levels of MBL professionals with those of an exceptionally qualified consumer lending professional. However, if credit unions with ambitious MBL programs want to successfully compete with commercial banks, then it only stands to reason they should seek out and adequately compensate qualified business lending professionals in a manner comparable to their banking counterparts. Those able to achieve greater revenues and yields for their employer while qualified to mitigate the risks on more complex transactions warrant compensation at least commensurate with industry norms.

Credit unions who subscribe to the idea that exceptionally qualified consumer lending professionals are an adequate and cost-effective substitute for qualified MBL professionals will ultimately learn that it’s neither to the consternation of their Boards. If credit unions want a slice of the MBL pie without the requisite financial commitment of properly staffing that program, the best alternative is MBL participations with a credit union properly staffed with qualified MBL professionals capable of originating quality member business loans.